Breaking: Last Minute Tax Changes & Year End Planning for Real Estate Investors

Up until the end of last week, we were all in the dark as to the fate of the tax world. Were we going to get the extensions for the tax benefits or were they all going away in a cloud of smoke?

Luckily for us, on Friday afternoon the President finally signed the extenders into law. For now, it looks like it is good news all around. The extension brought back a long list of tax deductions, credits, and breaks that were originally expected to expire. Here are some of the more relevant ones for individuals, business owners, and real estate investors:

Tax exclusions for primary home cancellation of debt income

Tax deductions for mortgage insurance premiums

Tax deduction for qualified tuition and related expenses

Low income housing tax credit for newly constructed buildings

Work opportunity tax credit

50% bonus depreciation and Section 179 deductions on new assets used for businesses

For the comprehensive list of tax changes that were recently signed into law, click here.

In the coming days, I hope to be able to expand more on each of these changes as we head into the 2015 tax filing season. However, in the meantime, let’s focus on some compliance and planning-related items that we can do before the end of the year to reduce our taxes and to minimize our audit exposure.

Set Up a Retirement Account

Keep in mind that you generally have until April 15th of 2015 to fund your retirement accounts for the 2014 year. However, certain types of retirement accounts, such as 401Ks or defined benefit plans, may need to be set up by December 31st of 2014 in order to reduce 2014 taxes. Therefore, make sure that you plan ahead to have these accounts in place before it’s too late. This way, when it comes time to file taxes, you can find out exactly how much of your contribution will be allowed and how much to actually make. This is especially important if you have a 401K account where the amount that you can contribute is based on your business income for that year.

On that same note, if you’re thinking of converting a Traditional IRA to a Roth, now is the time to do it. December 31st is the deadline to make that conversion. One great perk of the Roth conversion option is that if you change your mind, you have all the way until October 15th of 2015 (or the earlier if you file your taxes before then) to change your mind and re-characterize it back to a Traditional IRA.

Think about it. This is the IRS giving you a risk-free way to go into the future to see if your investment performs well. For example, if your investment is worth $10k today but worth $50k by next October, then this strategy may have allowed you to lock in $40k of gains tax-free. Now, if the investment value goes down to $5k on the other hand, you may be able to simply “re-characterize” your conversion and change it back to IRA with no taxes or penalties.

Don’t Forget About 1099s

Staying in compliance with the law is important to plan for as we get close to the end of the year. “Do I need to issue 1099s?” is a question that I get asked constantly, so I’d like to lay down the law. If you paid a roofer to fix the roof of your rental property, a plumber throughout the year for bathroom repairs, or pest control to get rid of termites, then you may need to issue a 1099-MISC to each of them if you paid for services over $600.

The only exception is for corporations; they do not require Form 1099s. The deadline to issue these forms is January 31st, so make sure that you have W-9 forms from each and every contractor that you paid over $600 to in 2014. If you don’t already have W-9s from your contractors, this is the time to make sure that you have all of those forms filled out with SSNs or EINs. This way, you can properly issue the 1099s. You don’t want to miss this in case you are audited!

Now, the reality is that there are lots of investors who hire day laborers and do not issue 1099s. What’s the worst that could happen? Well, if audited, the IRS penalty for not issuing the necessary 1099s can be up to 28% of the amount paid, so the question to ask yourself is whether your day laborer is worth the risk of the potential penalty.

Paying Now vs. Paying Later

Right now is a good time to decide whether you should prepay expenses in 2014 or wait until 2015. If your rentals are generating a lot of income this year, then it might be a good idea to renew your insurance early or to prepay for landscaping services or even property taxes. If your rental is underwater this year and you expect it to generate income next year, then you may want to do the opposite and wait until 2015 to spend additional cash.

With the extension of the bonus depreciation and Section 179 deductions, now is the time to consider purchasing any necessary assets used for your real estate business. If you need to buy new appliances for your apartment rentals, consider buying them before year-end to use the bonus depreciation benefits. If you are a flipper and are in need of a brand new work truck, you may get good tax savings this year, especially if the truck is used 100% for business and weighs over 6,000 lbs.

If you are planning on selling a property in the near future, then you may want to consider whether it will benefit you more this year or next year to sell the property. Having December 31st as your selling date versus January 1st could have huge implications depending on whether or not you sell at a gain or a loss. It also depends on what other income you have this year. If you have W-2 income this year, but will not have any in 2015, then maybe selling your property at a loss in 2014 could be a great idea. However, if you are selling at a gain, then you may want to wait until January. Each situation is different, so be sure to plan ahead with your advisor.

With the end of the year fast approaching, make sure that you are meeting deadlines and are well prepared for ringing in the New Year. Keep in mind that while some things like Roth Conversions can be undone, some decisions, such as prepaying expenses or selling properties, cannot be undone. Therefore, be sure that you make decisions that are appropriate for your situation for this year and look to the future tax years to weigh all of your options.

What are you doing to prepare for next year, tax-wise?

Don’t forget to leave a comment below!

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About Author

Amanda Han of Keystone CPA is a tax strategist who specializes in creating cutting-edge tax saving strategies for real estate investors. As real estate investors herself, Amanda has an in-depth understanding of the various aspects of investing including taxation, self-directed investing, entity structuring, and money-raising.

12 Comments

Enjoyed your post a lot. Great summary of recent changes. One question I have is whether you are saying that landlords are flat out required to issue 1099s to service providers for payments over $600. My recollection is that there is a huge open question as to whether rental income constitutes income in “trade or business” (or whatever the magic language in the statute is), which is one of the requirements for triggering the obligation to issue a 1099. As I recall, at one point Congress specifically stated that it did constitute “trade or business,” income and then amended the statute to withdraw the language. Are you suggesting landlords should issue 1099s out of an abundance of caution? Has something changed this year that clarifies the issue and requires that landlords issue 1099s? I’m not an accountant, so I could be way off base. Thanks!

Thanks for reading! Whether the landlord needs to issue a 1099 is a grey area still today. It would appear that if someone is not actively involved in the rental business may avoid 1099 requirements. However starting in 2013 the IRS form for rental properties has a new question that specifically asks if the landlord has issued the 1099s. The 2014 forms are not yet final so it is still up in the air whether that is a requirement. The AICPA has asked the IRS for specific guidance to get to the bottom of this once and for all and no answers….

For our clients, we recommend that 1099s be issued …the reason is that the issuance of 1099s protects the landlord in case of IRS scrutiny. The IRS has gotten more aggressive in the 1099 arena and the penalty is now up to 28%. I would definitely check with your tax advisor and do what his/her recommendations are.

Potentially yes…now whether the contribution is pre or post tax will depend on your situation so the best thing to do is to let your CPA know that you intend on putting IRA money in and they can tell you how much you can do when they prepare your 2014 taxes.

I am also under the impression we as landlords don’t need to 1099. I am not a professional as far as designation goes and at this point don’t consider this a trade or business; it is investment income and not a primary income. This could change but at this time it is passive rental income.